TSH is an integrated upstream and downstream palm oil company that is involved in plantation, milling, crude palm oil refinery, and other palm oil related activities. Its operations are mainly in Sabah and Indonesia.
Out of 100,000 ha land owned, only 13% are matured plantation. FFB production going forward is expected to grow close to 20% annually and will contribute substantially to the earnings of TSH. Valuation wise, TSH is trading at cheap single digit 9x FY11 PER due to the recent surge in CPO price. We recommend a long term Buy on TSH to ride the growth of its young trees.
Highlights:
Background – TSH is principally involved in oil palm plantation activities which contribute approx. 80% of its
total revenue. It is also involved in cocoa manufacturing and trading, with a minor percentage of business in
wood product manufacturing and trading via its 65% owned Ekowood International Bhd, listed company in the
Main Board of Bursa Malaysia. TSH was listed in Bursa Malaysia in 1994.
An integrated upstream and downstream palm oil company – TSH owns approx. 100,000 ha of land in
Sabah and Indonesia of which 95% or 95,248 ha are in Indonesia. Presently only 26% of its land bank is
planted where half are matured. Apart from plantation, TSH also owns 5 palm oil mills, 3 of which are located in
Sabah and the remainder 2 in Indonesia. The total capacity of all the mills is 1.5 m tonne/year. As TSH’s
plantations do not produce sufficient fresh fruit bunch (FFB) for its mills, TSH also buys FFB from external
parties. In addition, TSH is also involved in crude palm oil refinery and kernel crushing through a 50:50 joint
venture with Wilmar International Ltd (Wilmar) via Wilmar Sdn Bhd. With a strategic partnership with Wilmar,
TSH is assured of its success in the palm oil industry whereby TSH will be exposed to various best practices by Wilmar and have high chances of collaborating further with Wilmar in oil palm related business. land owned by TSH, only 26,000 ha is planted. Approx. 50% of TSH’s trees are immature (1-3 years old) whereas another 50% of the trees are aged 4-16 years old. The average age of TSH’s plantation in Indonesia is 1-3 years old, whereas the average age for its plantation in Sabah is 12 years old. In 2009, its FFB output is around 230,000 tonnes. We estimate that TSH will witness mature areas increasing by approx. 2,600 ha each year from the 13,000 ha of oil palm trees planted since 2005. This will mean an increase close to 20%pa for its FFB output. Going forward, TSH has plans for new plantings between 4,000 ha to 5,000 ha each year, which will ramp up its FFB production further in the longer term.
Palm oil price on uptrend as global warming worsen – In view of the erratic weather with unusual frequency
of rains and droughts amid the global warming effect, this is detrimental for palm oil and soya bean harvest
and hence drive up the prices of edible oil. Palm oil is a cheaper substitute of soya bean oil, therefore when
soya bean prices rises, palm oil prices are likely to follow. Currently, CPO futures is trading at 1 year’s high of RM3,700/tonne, way above RM2,400 average for first half of this year.
Still a bargain compared to peers – Compared to its peers which have different plantation profile ie. in terms
of size of land and % matured hectarage, TSH seems to be undervalued (Table 1). Undoubtedly its plantation
is still very young, FFB production currently is lacking compared to its peers but in the longer run, it has the
potential to grow further to reach the valuation of its peers like Genting Plantation, due to its large land bank of 100,000 ha. At RM2.53, TSH is trading at low single digit FY11 PER of 9x with immense growth potential as new planting increases over time and the fact that it has Wilmar as a strategic partner in its palm oil refinery activities is additional plus point.
Improving financials and decent dividend yield – Although the cocoa manufacturing and woods
manufacturing activities are dragging TSH’s feet, the operating earnings from the palm oil activity has been
increasing since 2006 registering a CAGR of 24.8%. This proves the transformation of TSH from a mere cocoa
and woods manufacturer to a growing integrated planter. We understand that the management may dispose of
its loss making cocoa and wood manufacturing related companies to concentrate on palm oil activities. If this
were to materialise, TSH is likely to register even better financials going forward. The net gearing of 84% is
high but is still manageable. Historically, TSH has consistently paid out a minimum 25% of the group earnings
as dividend. Based on a historical payout rate of 30%, we expect TSH to pay out 6.2 sen per share dividend,
implying a dividend yield of 2.5%.
Recommendation:-
We favour TSH because it is an integrated upstream and downstream palm oil company which has considerable growth potential in FFB production since it has large land bank of 100,000 ha with only 13,000
matured ha, that is currently trading at low single digit 9x FY11 PER and potential FY10 dividend yield of 2.5%.
As palm oil price rises, TSH is in a position to benefit. We recommend long term Buy on TSH.